Following a traumatic divorce, Elizabeth Gilbert cashed in all her savings and embarked on a year-long sabbatical exploring Italy, India and Bali - a story that has recently been turned into a block-buster movie – Eat, Pray, Love.
Hugh Hacking, Umbrella Fund Product Manager at Old Mutual Corporate, believes that anyone inspired by Gilbert’s willingness to live out her dreams, should not do so at the expense of their retirement savings.
Hacking cautions that for most of us, rather than embarking on an adventure on a whim, it is important to plan towards realising our dreams over time. “The first step is to estimate how much you will need to achieve whatever dream it is that you have set your sights on. Then set aside a portion of your salary each month and invest it in such a way that is best suited to helping you reach this target. It is worthwhile speaking to a qualified financial advisor, who could assist you in identifying the best strategy in this regard.”
He says cashing in your retirement savings should not even be a consideration, given that it is estimated that roughly only around 6% of South Africans are able to retire comfortably. He says that this is partly due to the fact that South Africans in general display an alarmingly low propensity to preserve their retirement savings when leaving or changing their jobs during their working lives.
Although 93% of all stakeholders surveyed in the Old Mutual Retirement Funds Survey 2010 agree that preserving retirement savings is important when exiting their existing pension or provident funds, the truth is that the majority of South Africans are not doing so.
“Preservation should be a primary focus for South Africans. This is not to say that people should not aspire to seek personal fulfilment by doing great things, but the funds for these activities should not come from retirement savings,” Hacking suggests.
Hacking says that the vast majority of employees who exited pension or provident funds administered by Old Mutual last year, cashed in their accumulated retirement benefits, rather than transferring them to another retirement savings vehicle.
While this is largely due to the need for cash during an extremely tough economic climate, the survey also provided some key insights into some of the reasons behind members’ decisions to preserve their benefits on exiting their retirement fund, or not.
Lack of advice at the time of withdrawal (53%), lack of understanding of consequences of the decision (62%) and a lack of awareness of preservation options (39%) were among the motivating factors mentioned for not preserving.
Hacking says it is also the responsibility of retirement fund trustees to provide members with counselling or financial advice to encourage them to keep their retirement fund savings invested for as long as possible and not cash them in when exiting their jobs or for impulsive urges.
He adds that Government is taking the issue extremely seriously, with some level of compulsory preservation likely to be included as part of the proposed retirement fund reforms. “In this regard, 36% of all funds surveyed said they were strongly in favour of compulsory preservation and another 48% of all funds surveyed said that they were strongly in favour, but with the choice of a service provider.”
Hugh Hacking Umbrella Fund Product Manager www.oldmutual.co.za